The Benefits of the LLC as a Business Structure for Entrepreneurs and Small Business Owners

The limited liability company or LLC is a popular choice as a structure for small businesses and entrepreneur enterprises in Texas, and with good reason. LLCs can offer liability protection without the complex administrative burdens of other structures such as a C corporation.

However, it is important to understand how an LLC operates and how it differs from other entities before deciding if this is the right choice for your company. In particular, it is crucial to pay attention to tax consequences because these are often overlooked in the decision-making process.

What is an LLC in Texas?

A Texas LLC is a unique entity that shares some of the attributes of both a partnership and a corporation. Owners of the LLC are referred to as “members” rather than shareholders, and a member can be either an individual or an entity such as a corporation or trust. Provided that the required formalities are observed during formation and operation, members of the LLC will not be held responsible for debts of the business.

LLCs can be structured in a number of different ways, providing tremendous flexibility for different types of operations and levels of owner involvement. Owners can structure an LLC to operate similar to:

  • A general partnership with limited liability
  • A limited partnership where all owners have the option to participate in management and all enjoy limited liability
  • An “S” corporation but without the restrictions on ownership and taxation

Whereas a partnership focuses on the individual partners, in an LLC, the focus is on the entity itself. For that reason, more formality is necessary to create and maintain an LLC than a partnership.

Pass-Through Taxation and Limited Liability

Two of the features that make LLCs so popular are the liability limitations and tax treatment. As a general rule, the liability of individual members is limited to their investment in the LLC, so creditors cannot reach personal assets as they could in a partnership. Unlike the situation with a corporation, in which earnings are taxed at the corporate level and again when received by shareholders, the members of an LLC usually enjoy pass-through tax treatment, so that their income from the LLC is taxed along with other personal income while the entity itself does not pay separate taxes.

Examples of the Use of an LLC for Small and Startup Businesses

LLC structure can offer so many benefits that some mega enterprises such as Google make use of it. However, it can be most effective for smaller enterprises. For instance:

  • A cleaning service set up as an LLC establishes a more professional tone that can make it easier to attract new business customers.
  • A landscaping service set up as an LLC provides the owners with liability protection in case a customer or bystander should be injured by lawn equipment.
  • A doughnut shop set up as an LLC could allow the member who is coming in to make doughnuts everyday to take a greater share of the profits than the member who only comes in to help on weekends.

An experienced attorney can help businesses decide the type of structure that makes the most sense based on their needs and circumstances.

What to Know About Forming an LLC in Texas

To form a Texas limited liability company, you need to prepare and file a certificate of formation with the Texas Secretary of State. The company will need a distinctive name that is not too similar to an existing taxable entity. In addition, the LLC will need to have a registered agent with a physical address in Texas who agrees to accept documents on behalf of the entity.  

When preparing the certificate of formation, you will need to describe the purpose of the activity conducted by the LLC and describe the management structure, including whether the LLC will be managed by members or by an appointed manager. Managers will need to be listed by name and address.

In addition to the filing requirements, the LLC should have an operating agreement that describes business operations and obligations. There will be a filing fee to set up the entity and state franchise tax to be paid annually. An attorney can assist with all the requirements to establish and maintain an LLC in compliance with legal requirements and in a way that minimizes potential conflict in the future. An experienced attorney can also assist with other key activities such as obtaining necessary permits and licenses, determining insurance needs, and filing annual reports with the state comptroller’s office.